Chinese Communism and the Human Cost of the Cultural Revolution

It's true that the destruction of financial wealth - stocks and bonds - has repercussions in the real economy.

You get lower economic growth. You also get social instability. This kind of instability makes politicians nervous, which brings us back to the story of Bo Xilai in China.

The most plausible story line emerging from the sordid tale is that one faction has seized on events as a chance to improve its position and the position of the Chinese Communist Party in Chinese society. If former Chongqing party chief (and Bo Xilai's wife), Gu Kailai, is implicated in the poisoning death of British businessman Neil Heywood, it can either be a negative or positive event for the Party.

It's a negative if the public sees the affair as evidence of corruption and hypocrisy at the heart of the Party. Stories are now emerging that Heywood may have helped Gu Kailai move money out of China into offshore accounts. Whether that money was ill-gotten or not is unknown. His death may have been a result of a request for a larger fee for his help in moving funds. Or, it could also be a result of the fact he knew a lot of potentially embarrassing information that could damage the position of one of China's rising political stars.

It's worth noting that at exactly the time the Party stripped Bo of his position in Chongqing and on the 25-member Politburo, Wen Jiabao addressed a Party gathering and said that if political reform did not follow economic reform in China, not only would the public lose trust in the government, but also that, "mistakes like the Cultural Revolution may happen again."

That's a stunning comment. And it was most certainly directed at Bo Xilai, who had begun reviving the Maoist tradition of mass "red sing-a-longs". Bo got modern too, Tweeting portions of Mao's Little Red Book. Wen essentially warned Bo and non-reformist members of the party that a return to a political hardline in China would be a disaster.

It's hard to understate the human cost of the Cultural Revolution. Mao's sociopathic attempt to create a cult around his personality resulted in the deaths of millions of Chinese. Mao tried to erase traces of capitalism from Chinese society and also traces of traditional Chinese society. It's always the radicals with infinite self-belief that end up sending millions to their death.

Excessive self-belief in rational ideas about how to reorganise society almost always leads to mass death and poverty. Why? When you decide that you and your henchman are smarter than years of tradition, the rule of law and that the Cult of the Leader is more important than organic relationships such as family, or even consensual economic relationships (voluntary exchange), you are behaving in a decidedly sociopathic fashion.

And when you use force to remake society in your own image, with your own laws or personality as the centre, you have gone crazy in a dangerous and predatory way. This happens in communist countries. It happens in fascist countries. And it happens when the cult of personality replaces natural relationships between individuals. It always ends in bloodshed. And it always springs from the same idea that smart people can reorganise the world to the way things "should" be.

Wen seems keen to direct public anger at the behaviour of China's princelings to Bo, and concentrate it there. The Party's credibility with the public can be preserved if it's seen to discover and punish the most corrupt officials. One reading of current events is that it's the party acting to restore its image by hanging out to dry one of its most ambitious but over-reaching stars.

Maybe the rot is already too deep. Maybe the economic and political forces unleashed by China's furious two decades of growth are too wild and powerful for the Politburo and the Communist Party to channel and contain. It wouldn't be the first time a small group of elite technocrats placed too much faith in their own ability to manage a complex system. It's what Hayek called the fatal conceit.

Or maybe this is the evolution that has to happen in China. The 18th Party Congress this year will elect the fifth generation of Chinese leaders. Those leaders will be in office for 10 years. And in that time, they will surely have to deal with the endgame of the world's current monetary system. Can they do it and prevent China from coming apart at the seams economically and politically?

The stakes couldn't be higher for Australia. It's a story worth watching. And more importantly, it's worth taking action now, before events pick up speed. Stay tuned.

The Daily Reckoning's mission is to look at the investment world and the financial world in a sceptical and contrarian way. To do that day in and day out and tell you honestly what we see, even if it isn't always popular. If you'd like to subscribe to an alternative look at the mainstream interpretation of events, join for free here.